EpisodeSix on the Bringing of Real-Time Payments to Commercial Banking

Banks are often slow to adopt the latest technology, and in many cases that is warranted. As highly regulated institutions tasked with protecting valuable data, banks understandably want to avoid “running with scissors.” By starting slow with simply implementing APIs in a few areas, they can begin to modernize and ultimately provide streamlined payments solutions, like RTPs, to their largest pool of customers.

It’s safe to say that the U.S. is behind other parts of the world when it comes to certain payments innovation, especially making and receiving real-time payments (RTPs). Various industry and governmental groups have talked about RTPs for what seems like more than a decade. Currently, the Federal Reserve has plans to develop a real-time payments system, to go live in 2023, while The Clearing House – a consortium made up of 25 of the world’s largest banks – is in its early stages and serves only an estimated 50% or so of the country.

The lack of RTP innovation thus far is even more pronounced in the B2B payments space where manual, inefficient processes are common and powered by dated technology that was created for an earlier time. We live in a fast-paced, digital world, and B2B payments are steps behind in fulfilling what is now considered to be a basic need: getting paid on time. Remittances are a perfect example. This is an area ripe for innovation as recipients in many cases can’t afford to wait for the two to three standard days it takes for a payment to clear.

Some banks have tried to remedy payments inefficiencies created by legacy systems by making smaller investments in commercial payments technology, but this piecemeal solution is only papering over the cracks. The real issue is that in the U.S., the legacy systems used to run banks – and the rails on which payments are moved – simply weren’t built to handle RTPs. Replacing legacy technology can be expensive and unwieldy, especially in larger institutions that often rely on multiple systems.

At the same time, there are different internal divisions within banks, all of which need to give the buy-in to go ahead with modernization projects. Being able to link various silos and manage currency conversion, for example, across different data stores is critical. Just look at the logistics and shipping industry where many involved parties are not just dependent on legacy technology but also paper-based processes that date back centuries. Streamlining these processes provides added value, frees up liquidity and makes banks’ commercial clients more “sticky.”

The power of APIs

Innovation and real-time payments are nonetheless something that banks must provide to their customers, especially merchants and corporates that want the real-time settlement of B2B and cross-border payments. The most efficient way to quickly offer such services to commercial customers without replacing entire systems in one fell swoop is to utilize the power of application programming interfaces, commonly known as APIs. Open APIs provide developers with access to proprietary software or web services. By exposing their APIs to third-party developers, banks can leverage FinTech networks and their resources, allowing for virtually unlimited development potential – including the incorporation of real-time payments for commercial customers.

API adoption is slowly but steadily increasing in the banking industry, mostly for connecting with FinTechs to offer new digital retail products. It’s only a matter of time before the power of APIs is put to use to drive commercial payments forward, as well. One way for big banks to start exploring APIs is to implement an API-powered digital service in one department and expand from there as it makes sense.

The siloed nature of banks – with cross-border payments, accounts payable services and virtualization of accounts all generally being handled by different divisions – makes it hard to do everything at once. By slowly implementing, the evolution to more streamlined processes will be more digestible. APIs make it easy to not only develop a new digital solution but to also take the solution to market much more quickly than normal.

Eventually, a network of APIs can be built to be a unifying solution to tie together the data and systems of different departments and different business units, making it much easier in a cross-border setting to connect between different buying centers around the world, for example.

Future-proof your business

An API-centered approach allows for banks to “future proof” against even further digital disruption. Buying a static, out-of-the-box solution now from a technology vendor means that it will only become obsolete in a few years’ time. But with open APIs, institutions can always be connected with FinTechs and developers that are on the cutting edge, developing the latest digital technologies.

Further, banks also need to think about the regulatory and compliance risks of not modernizing payments systems. Many regulatory bodies around the world have different rules regarding how payments are processed and managed, such as dealing with a myriad of AML and fraud controls and KYC rules to be complied with. It can be inefficient to meet these standards and comply with these rules with legacy technology and by relying on manual processes. However, automating these processes leveraging APIs and innovative technology solutions can provide consistency and compliance across the entire payments journey.

Banks are often slow to adopt the latest technology, and in many cases that is warranted. As highly regulated institutions tasked with protecting valuable data, banks understandably want to avoid “running with scissors.” By starting slow with simply implementing APIs in a few areas, they can begin to modernize and ultimately provide streamlined payments solutions, like RTPs, to their largest pool of customers.

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About the Author

John Mitchell is the CEO of next-generation payments software technology provider Episode Six, and an expert in the payments industry with decades of experience in leading and growing startups. Prior to co-founding Episode Six, Mitchell was the CEO of Rêv Worldwide. Prior to Rêv, he was at NetSpend Corporation where he was the primary architect and strategist of NetSpend’s sales and distribution strategy.